National Income

WILFRED BECKERMAN

Although there are numerous complexities and ambiguities attached to this

concept, and a variety of reasonable alternative ways in which it may be articulated
in detail, national income corresponds basically to the income accruing to a
nation by virtue of its productive activity. Some of the ambiguities, therefore,
arise on account of different definitions of what constitutes a 'productive activity'.
Hence, the best approach to the concept of national income is via the more
widely used concept of 'national product', or one of its variants. Of these the
most commonly used has been 'gross national product'.
The gross national product is the unduplicated value of what a nation produces.
The qualification 'unduplicated' indicates that the value of the total output of
the economy in question must be estimated without 'double counting'. That is
to say, one must not count the value of goods that are used up in the production
of other goods both when they are produced and then again in the value of the
other goods in which they are subsequently embodied. For example, in a simple
agricultural economy that produced only wheat which is then turned into flour
and then into bread, it would be misleading to add the value of the wheat and
the flour to the value of the bread since the latter already includes the value of
the wheat and flour embodied in it. Thus one method of measuring the output
of an economy is to measure the goods and services that cross 'the production
boundary' - that is, pass from the productive sector to what is known as 'final
demand', where the goods in question are not used up again in the production
of other goods.
In other words, one way of estimating a country's gross national product
(GNP) in any time period (say a year) is simply to add up the total of all the
goods and services that enter into 'final demand'. Final demand is generally
defined as comprising 'capital formation' (capital goods plus changes in stocks),
private consumption (food, clothing, entertainment and so on), as well as public
consumption (e.g. expenditure on schools, hospitals, defence, etc.). It is also
necessary to add exports, since although these are not used by the population

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© Palgrave Macmillan, a division of Macmillan Publishers Limited 1991
World of Economics

of the economy in question they have been produced by them and give them
claims on other countries. In the same way it is necessary to subtract imports
because although these would be included in the value of the consumption and
other expenditures of the nation in question they have not been produced by
that nation but represent, instead, claims by other nations.
The particular classification of final demand set out above is not, however, the
only classification that would be legitimate as a means of arriving at the same
total. For largely historical reasons the millions of individual transactions entering
into final demand are summarized in classes that reflect some 'model' of the way
that economic activity is determined. Since national income accounting- at least
in Britain (though less so in the United States)- grew up in close conjunction
with the widespread adoption of Keynesian theory in British economic circles
towards the end of the 1930s and, even more particularly, in conjunction with
Keynes's influence, during World War II, on the quantification of the problem
of how to reconcile available resources with the heavy claims on these resources,
it was inevitable that the national accounting methods and conventions developed
(largely under the direction of Richard Stone) were heavily influenced by the
Keynesian model of income determination.
In particular, expenditures on final output were classified into those classes -
notably government expenditure on goods and services, investment and exports
- which, in the simplest possible Keynesian model, could be regarded as largely
exogenous injections into the flow of income, and those - private consumption
and imports - which were endogenously determined. These categories constitute
the variables that appear in the most elementary of Keynesian macroeconomic
models.
The influence of Keynes's concern with - amongst other things - the effect of
financing the British war effort on the development of national accounting was
mirrored in the shift in the focus of national accounting in the US away from
its earlier primary concern with measuring 'national income' in the direction of
measuring gross national product. The two concepts differ since the capital goods
that are included in final demand do, in fact, get 'used up' in the production of
other goods, if not in the same time period to which the estimate of national
product or income refers. Hence, some deduction needs to be made in each time
period to allow for the depreciation of the capital stock in that time period in
order to arrive at the economy's net output. The resulting concept, which is often
known as net national product (by contrast with gross national product), is thus
equal to national income. This corresponds to the concept of 'income' when this
is defined as the income available to any economy after it has set aside something
to maintain capital intact. Thus whilst in any short period a country's gross
national product measures the total amount of goods and services that it produces
and could use up in that period, clearly it could not maintain that level of
production and use of resources if it did not set aside a part of the output for
maintaining its capital stock.
The shift of interest from national income to GNP was largely the result of
the need to measure what an economy's production capacity would be in the

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